Sentry denied his tender of defense, reasoning that his alleged acts were “intentional,” thus falling within the policy's exclusion for “intentional” acts. Sentry interpreted “intentional” to mean “voluntary and deliberate.”

Mr. Berns sued Sentry for breach of contract and bad faith.

The Ninth Circuit ruled in favor of Mr. Berns on his breach-of-contract claim, holding that “intentional” required “some sort of wrongful conduct, not just any purposeful act.” Berns v. Sentry Select Ins. Co., 656 F. App'x 326, 327 (9th Cir. 2016).

Sentry then paid Mr. Berns his defense fees, which left his bad-faith claim pending.

The U.S. District Court for the Central District of California subsequently granted summary judgment in favor of Sentry on the bad faith claim, and the dispute again reached the Ninth Circuit.

The Ninth Circuit's Decision

The Ninth Circuit affirmed, finding that Mr. Berns failed to show that Sentry had acted in bad faith.

In its decision, the circuit court explained that, under applicable California law, to establish bad faith, an insured must show that (1) benefits due under the policy were withheld, and (2) the reason for withholding the benefits was “unreasonable or without proper cause.” To constitute “bad faith,” the circuit court continued, “there must be more than just an insurer's contractual breach or mistaken judgment.”

The Ninth Circuit then found that Mr. Berns had demonstrated “merely that the insurance company incorrectly denied him policy benefits, not that it acted in bad faith.”

According to the circuit court, Mr. Berns had to show that Sentry was guilty of more than a mere “honest mistake, bad judgment or negligence.”

The circuit court reasoned that although an insurer's denial must be reasonable under all the circumstances, Sentry had not acted unreasonably in interpreting the term “intentional” to mean “voluntary” given that California law “was then mixed as to the definition of 'intentional.'”

Because bad faith implied “unfair dealing rather than mistaken judgment,” and the authorities were divided, the Ninth Circuit ruled, Sentry was not liable for bad faith.

The circuit court concluded that its interpretation of the word “intentional” as requiring a wrongful intent had no bearing on whether Sentry, at the time of its coverage denial (which was prior to the circuit court's decision), had acted reasonably in interpreting the word “intentional” as it did.

The case is Berns v. Sentry Select Ins. Co., No. 17-56264 (9th Cir. March 29, 2019).